A key failure of large structural macroeconomic models, according to the theory of rational expectations, is that the models assumed that expected inflation is independent of
A)monetary policy.
B)past inflation.
C)interest rates.
D)aggregate demand.

Question

Quizplus · Accepted Answer

Large structural macroeconomic models failed because they assumed expected inflation was independent of monetary policy, whereas the theory of rational expectations suggests that agents' expectations will incorporate all available information, including the impacts of monetary policy on inflation.

A Key Failure of Large Structural Macroeconomic Models, According to the Theory